Clean-Energy Funding to Dry Up After Obama’s Grant Program Ends

By Andrew Herndon -
Nov 30, 2011

U.S. financing for renewable energy
will drop next year after the expiration of a grant program that
backed at least $32.9 billion in projects, one of President
Barack Obama’s most ambitious efforts to support the industry.

The program, which ends Dec. 31, encouraged companies
including Google Inc. (GOOG) and Citigroup Inc. to take equity stakes
in wind and solar projects. It paid out $3.3 billion last year,
about a 10th of the $34 billion invested in clean energy in the
U.S., and provided $9.6 billion since 2009.

Congressional leaders have given no indication they’re
weighing renewal of the grants as the government faces budget
cuts and lawmakers probe clean-energy subsidies, including a
$535 million loan guarantee for failed solar manufacturer
Solyndra LLC. The U.S. aid supported projects by developers such
as NRG Energy Inc. and Noble Environmental Power Inc.

“There’s just no way we can compensate for the cash grants
if they go away,” Marshal Salant, managing director of
Citigroup Global Markets Inc., said in an interview.

The 1603 program began in 2009 allows sponsoring companies
to get cash from their investments after construction is
complete instead of waiting for an offset applied to the next
year’s tax bill. Solyndra didn’t receive money under the 1603
program.

Selling Equity Stakes

Many developers don’t have enough taxable income to use the
full credit and sell equity stakes to large backers that can
apply a portion to their own tax bills. The grants made this
arrangement, known as tax-equity financing, more appealing to
potential backers.

“There’s more demand for tax equity to finance renewable
energy projects than we will ever have in the way of supply,”
Salant said.

Renewable-energy developers will be seeking about $10
billion in tax-equity financing for projects next year, said
Arno Harris, chief executive officer of Recurrent Energy Inc.,
the solar development unit of Sharp Corp.

“The Treasury grant program has been very successful at
closing the gap and keeping renewables momentum moving
forward,” Harris said in an interview.

The grant program, intended to spur clean energy and create
jobs, funded 22,747 projects to date, according to Treasury
Department data released Oct. 31. Recipients range from property
owners who install rooftop photovoltaic panels to developers
such as First Wind Holdings Inc. and solar leasing companies
such as SunRun Inc. The grants contribute as much as 30 percent
of development and construction costs.

‘How Do You Pay?’

While the grant program has broad support in Congress, the
difficulty of finding the money in the budget makes chances for
an extension “extraordinarily low,” Christine Tezak, a Robert
W. Baird & Co. analyst in McLean, Virginia, said in an
interview. “How do you pay for it? Where do we come up with the
$3 billion?”

“Extension of this program will create jobs, spur economic
growth and promote private sector development of energy
technologies,” the companies wrote.

Active Investors

There were 15 companies, mostly banks, actively involved in
renewable energy tax-equity investing as of July 2011, according
to the U.S. Partnership for Renewable Energy Finance, an
industry group comprising law firms, financiers and project
developers. Those investors are forecast to provide about $3.6
billion in tax-equity funding next year, the group estimated.

Many tax-equity investors support renewable energy only
because of the Treasury Department grants, said Edwin Feo,
managing director at USRG Renewable Finance LLC, a Los Angeles-
based investing company.

Without the program, “there’s a number of participants who
don’t play anymore,” he said.

Seeking ‘More Googles’

Investment banks have been trying to educate large,
profitable corporations about tax-equity financing for renewable
energy “in the hopes of identifying more Googles,” said Martin Klepper, a partner at law firm Skadden, Arps, Slate, Meagher &
Flom LLP in Washington.

Google, operator of the world’s largest search engine, and
PG&E Corp., which operates California’s biggest utility, were
the only non-financial companies providing tax-equity financing
last year, according to Partnership for Renewable Energy
Finance.

Google has invested more than $820 million in renewable
energy projects and companies. Rick Needham, its director of
green business operations, said in July that the company uses
tax-equity financing to lower its tax burden and also wants to
set an example for other large companies.

The 500 largest U.S. public companies paid $137 billion in
taxes in the past year, payments that could be offset with tax-
equity financing, according to a Nov. 21 report from Bloomberg
New Energy Finance.

Hard Sell

Tax-equity financing is a hard sell even for the biggest
companies involved, Citigroup’s Salant said. “We’re all under
pressure not to make less liquid, long-term investments,” he
said. “It’s not something we can do a whole lot of.”

Some companies, including Wells Fargo & Co., say they
intend to continue tax-equity investing if the grant program
expires. The bank has done at least $2.1 billion of tax-equity
deals since 2006, said Barry Neal, head of Wells Fargo’s
environmental finance group

“We were active pre-cash grant and we will remain active
regardless of what happens with the cash grant,” Neal said in
an interview. “We certainly have the ability to monetize tax
credits and expect to do so into the future,” he said.

The grant program was initially set to end at the end of
last year. It was extended for a year as part of a December 2010
compromise linked to renewing a package of tax cuts enacted by
President George W. Bush. Salant said he doubts another last-
minute reprieve will happen.

“In a year like this, where everyone is so focused on the
budget, we worry that it unfortunately will be difficult for
1603 to get extended,” Salant said.